Real Estate Bubble Theory Shows More Evidence: John Wasik
July 28 (Bloomberg) -- When it's sweltering, you seek a cool place. When it comes to hot residential real estate, it may be time to cool your ardor.
Federal Reserve Chairman Alan Greenspan and the real estate industry insist that there's no real estate bubble. Greenspan's conventional wisdom argument is that most people don't turn over relatively illiquid real estate the way they sell stocks and bonds.
That's true, yet there's evidence that housing prices may be slackening. A combination of high consumer debt, unemployment and the flow of hot money back into stocks will trigger a decline in the hottest residential markets. It's time to prepare for the inevitable bursting of the bubble.
John Talbott, author of ``The Coming Crash in the Housing Market,'' (McGraw-Hill, 2003) and a former vice president with Goldman Sachs, says the housing market is already experiencing a decline.
Applications for new home loans fell 5.4 percent in the week ending July 18, the lowest level in three months, according to the Mortgage Bankers Association of America, an industry group. Rates on 30-year mortgages rose 0.39 percentage point to 5.72 percent, the largest weekly increase since November 2001. Housing prices also are shifting into reverse.
``While 199 out of 200 cities saw housing price increases last year, approximately 60 percent of those markets showed a decline in the first quarter of 2003,'' Talbott says.
The Evidence
It's not easy to be a Cassandra when it comes to home prices, which have been rising at double-digit clips in markets from Manhattan to Manhattan Beach, California, for the last three years.
If the economy is doing so poorly, why are people still bidding up home prices? Talbott says that housing-price increases are being skewed to present a brighter picture.
Talbott takes issue with the widely cited U.S. national average of home prices that shows them rising at an annual rate of 7 percent. The survey comes from the National Association of Realtors, or NAR, the industry's main trade association, as of March 31.
If you look at only six months of price data prior to March 31, Talbott says the ``national growth rate for existing home prices is almost zero percent.''
Accepting the theory that real estate has been a monetary refuge from the stock market -- and stocks are entering a bull market -- then investors may be moving their money from Main Street back to Wall Street.
Price Declines Noted
Using the six-month figures, Talbott discovered price declines in several markets from October 1, 2002, through March 31. Here's a sampling from the NAR price survey, which can be found at http://www.realtor.org/research :
-- Monmouth, Ocean, Middlesex, Somerset and Hunterdon Counties, New Jersey, declined 3.3 percent.
-- The San Francisco Bay area lost an average 1.43 percent.
-- In the Southwest and Midwest, declines were noted in Amarillo, Texas, (negative 3.4 percent), Akron, Ohio, (off 5.5 percent), and Chicago, Illinois,(down 1.47 percent).
-- Even previously reported double-digit increases are chastened by the most recent six months' of data. The 15 percent annual increase in the New York metropolitan area becomes a 2.84 percent rise and the 20.5 percent swell in Orange County, California, drops to 3 percent ascent.
Although Talbott's numbers are higher when you annualize -- I have figured the straight percentages -- they could signal a slowdown.
``This is a far more pessimistic story than that presented by industry news releases,'' he says.
The Speculation Factor
``Why are prices high?'' asks Talbott. ``Buyers are not price sensitive because they are leveraged and playing with other people's money and banks don't care about prices paid because they don't hold the mortgages they create.''
Then there's the troubling economy. The jobless rate in June rose to 6.4 percent, the highest in more than nine years. The dour jobs situation exacerbates a housing decline. When homeowners lose jobs, they can't pay their mortgages if they are in heavy debt and have no liquid savings.
Oppressive debt has led to a record number of vehicle repossessions and personal bankruptcy filings. Personal bankruptcy filings alone continue to break new records. There were more than 1.6 million bankruptcies for the period ending March 31, according to the administrative Office of the U.S. Courts. That's up 7.1 percent from the previous year.
Personal debt, joblessness and easy credit account for the home foreclosure rate hitting an all-time record of 1.2 percent of all mortgages outstanding in the first quarter, according to the Mortgage Bankers Association.
The way these cycles work, it will be years before highly leveraged homeowners -- spurred on by mortgage rates hitting 45- year lows -- work through their debt woes. Meanwhile, millions of properties will be sold at distressed prices.
Protective Strategies
Do Talbott's observations mean an easing in prices? Or is it the popping of a bubble?
The National Association of Realtors counters that tight housing stocks and low mortgage rates will push the existing home price 6 percent higher this year.
``Lower than expected mortgage interest rates have brought more buyers into the housing market offsetting sluggish economic growth and weakness in the labor markets,'' said David Lereah, NAR's chief economist in a statement.
Tablott urges caution for most homeowners and investors. ``You have enough risk in real estate through your home,'' Talbott says. ``Get rid of mortgage company stocks and real estate investment trusts in your stock portfolio and sell your second home.''
Whether you believe Talbott is unimportant. Housing prices will settle down eventually. If you have more than 60 percent of your net worth invested in residential real estate, it's a good time to invest elsewhere for the sake of diversification. Sometimes you need financial shelter from the shelter you live in.
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John Wasik , author of "The Kitchen-Table Investor," is a columnist for Bloomberg News. The opinions expressed are his own.